Data company DeFi Pulse and investment-minded Set Protocol have created a permissionless index of the very best DeFi tokens, called the DeFiPulse Index.
DeFi Pulse has become the key source of information for assessing which projects are leading and which ones are rising, judged by the total amount of crypto staked on each one, which the company calls Total Value Locked (TVL).
“We want a way that people can get exposure to DeFi without having to go and buy every token individually, because that costs a lot of gas,” Scott Lewis of DeFi Pulse told CoinDesk in a phone call.
Ethereum users can now get exposure to a curated set of DeFi projects by buying one token, called DPI, available now on Uniswap: No staking, rebasing, swapping or composing required. It will also be available on Set’s TokenSets, through Zapper, Argent, Dharma and others.
While there have been questions about the underlying value in the DeFi market, Lewis pushed back.
“Decentralized finance is infrastructure to enable human coordination. Traditional finance is also infrastructure to incentivize human coordination, and when humans work together it produces value,” Lewis said. “It’s still early. We still have to figure out if that’s an experiment that works.”
The index will have 10 DeFi tokens: LEND, YFI, COMP, SNX, MKR, REN, KNC, LRC, BAL and REP. That order is arranged from the largest portion of the index (LEND at 18.3%) to the smallest (REP at 1.63%).
“It’s like a [market] cap-weighted index,” Lewis explained, which he described as “analogous to how the S&P 500 is weighted.”
The team has an extensive list of criteria for tokens included on the list, including always limiting it to Ethereum, eschewing synthetics, options, wrapped tokens and tokens that stand in for real-world assets. Tokens need to have some respectable time in the markets and of course they have to be listed on DeFi Pulse.
Set CEO Felix Feng emphasized that while there are some synthetic options that represent the same exposure, DeFiPulse Index will represent real assets. That means a user could take the DPI token to Set and redeem it for the actual underlying assets.
The index will be rebalanced from time to time, though probably at the beginning more frequently than the quarterly rebalancing more typical indexes use. It will depend on market conditions, both Set and DeFi Pulse noted, with the goal of moving to quarterly shifts eventually.
The initial token is targeting a price of roughly $100 each, though like all crypto it will be divisible so users should be able to buy in at any amount they like.
Not only is DeFi complicated, but as its popularity grows a lot of untrustworthy projects have arisen. A part of the purpose of the DeFiPulse Index is to let buyers know the coins represent vetted projects.
“DeFi Pulse makes its reputation from separating authentic projects from inauthentic projects,” Lewis said. “We’ve talked to enough teams all over DeFi to sense which ones are really trying to build quality projects.”
For most users, DeFiPulse Index will be accessible by purchasing on exchanges like Uniswap, though for larger traders and desks they can also mint the token directly through Set Protocol, by depositing the underlying assets directly.
“I think one of the things that’s really exciting about the DeFiPulse Index is we think it’s going to be a pretty key asset in the entire industry. We anticipate that this asset will be used for yield farming,” Feng said.
“The crypto market’s changed a lot. The kinds of strategies that people are interested in change depending on the market,” Feng said.
The DeFiPulse Index is the first product coming out of Set Protocol v2.0. Over the period of “crypto winter,” Feng explained, Set focused on two-token sets that gained value through programmatic trades based on technical analysis. It’s what the company had to do, but enabling indexes was always what Set wanted to build the most.
This index represents the first offering from v2, Feng explained. Later on, the firm will debut indices that can incorporate the more complicated features of DeFi, such as derivatives.
Tokens with unusual behaviors, such as AMPL’s rebasing mechanism, would not work for the current stage of v2, but that’s coming. Set will be rolling out updates over the coming year.
Within the current DPI array, there are tokens like YFI that earn a small amount of dividend by staking, but YFI in the index won’t be staking and COMP won’t be engaging in governance, at least not at the beginning.
“Currently the initial version will be abstaining [from voting]. But in the future we could enable active participation of the token in governance. Or even to generate additional yield,” Feng said.
Feng described DeFi Pulse as a natural first partner for this product. “DeFi Pulse is one of the main destinations in DeFi,” Feng said. “Given their understanding of all the different projects and their growth, they had really good domain knowledge.”
And as for the target audience, Feng was clear:
"We are pretty excited to give retail access to DeFi."